SAUER DANFOSS INC (SHS)

10-K

Annual report pursuant to section 13 and 15(d)Filed on 03/03/2011Filed Period 12/31/2010

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SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2010

COMMISSION FILE NUMBER: 1-14097

SAUER-DANFOSS INC.

(Exact name of registrant as specified in its charter)

Delaware 36-3482074(State or other jurisdiction ofincorporation or organization)

(I.R.S. EmployerIdentification No.)

2800 E. 13th Street, Ames, Iowa 50010(Address of principal executive offices) (Zip Code)

(515) 239-6000

(Registrant's telephone number, including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

Common Stock, par value $0.01 per share New York Stock Exchange

(Title of each class) (Name of each exchange on which registered)

Securities registered pursuant to Section 12(g) of the Act:

None

(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of 1933. Yes o No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Act"). Yes o No x

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Act during the preceding 12 months (or for such shorter periodsthat the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and postedpursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post suchfiles). Yes o No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, indefinitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K: x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "largeaccelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer o Accelerated filer x Non-accelerated filer o (Do not check if a smallerreporting company)

Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act): Yes o No x

The aggregate market value of the voting common stock of the registrant held by nonaffiliates based on the last sale price on June 30, 2010 was $141,069,244. (The registrant does nothave any other authorized common equity.)

As of March 1, 2011 there were 48,413,316 shares of common stock, $0.01 par value, of the registrant outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the annual meeting of stockholders to be held June 17, 2011 are incorporated by reference into Part III.

PART I

Item 1. Business.

(a) General Development of Business

Sauer-Danfoss Inc. (the Company), a U.S. Delaware corporation, and its predecessor organizations have been active in the mobile hydraulics industrysince the 1960s. Sauer-Danfoss is a global leader in the development, manufacture, and marketing of advanced systems for the distribution and control ofpower in mobile equipment. The Company designs, manufactures, and markets hydraulic, electronic, and mechanical components, as well as software andintegrated systems that generate, transmit, and control power in mobile equipment. Principal products are hydrostatic transmissions, open circuit pistonpumps, open circuit gear pumps and motors, low speed high torque motors, steering units, microprocessor controls, electrohydraulics, and control valves. TheCompany sells its products to original equipment manufacturers (OEMs) of highly engineered, off-road vehicles who use Sauer-Danfoss products to providethe hydraulic and electronic power for the propel, work, and control functions of their vehicles. The Company's products are sold primarily to the agriculture,construction, road building, turf care, material handling, and specialty vehicle markets. The Company conducts its business globally under the Sauer-Danfossname.

On December 22, 2009 Danfoss A/S, the majority stockholder of the Company, issued a press release announcing its intention, through its wholly ownedsubsidiary, Danfoss Acquisition, Inc., to commence a cash tender offer to be followed (in certain circumstances) by a statutory merger for the purpose ofacquiring all the outstanding shares of Company common stock not already owned, directly or indirectly, by Danfoss A/S for a price of $10.10 per share. OnMarch 9, 2010 Danfoss A/S announced it would be launching the tender offer on March 10 for a price of $13.25 per share. On March 19, 2010 the SpecialCommittee of the Sauer-Danfoss Board of Directors announced its recommendation that the stockholders of the Company accept the cash tender offer of$13.25 per share and tender their shares pursuant to the offer. On April 9, 2010 Danfoss A/S announced that it had increased its cash offer price to $14.00 pershare. On April 16, 2010 the Special Committee requested the Company's management to prepare updated financial projections covering 2010 through 2012so that it could use this information in analyzing the increased offer of $14.00 per share by Danfoss A/S. On April 23, 2010 the Special Committeerecommended that stockholders reject Danfoss' $14.00 per share offer and withdrew its earlier recommendation of Danfoss' previous $13.25 per share offer.On April 30, 2010 Danfoss A/S announced that their $14.00 per share cash tender offer for outstanding shares of Sauer-Danfoss Inc. expired at midnight onApril 29, 2010 without acceptance of the tendered shares, due to the minimum tender condition not being satisfied.

(b) Financial Information About Segments

The Company reports its operating segments based on its product lines of Propel, Work Function, Controls and Stand-Alone Businesses. Propel productsinclude hydrostatic transmissions and related products that transmit the power from the engine to the wheel to propel a vehicle. Work Function productsinclude hydrostatic steering units, geroller and gerotor motors used for both propel and work functions, as well as gear pumps and motors that transmit powerfor the work functions of the vehicle. Products in the Controls segment include electrohydraulic controls, microprocessors, and proportional valves thatcontrol and direct the power of a vehicle. Products in the Stand-Alone Businesses include cartridge valves and hydraulic integrated circuits (HICs), opencircuit gear pumps and motors, directional control valves, inverters, light power hydrostatic transmissions, gear reduction drives, piston pumps and wheelmotors. Information about the Company's reportable segments defined by product lines is set forth in Note 17 in the Notes to Consolidated FinancialStatements on pages F-31 through F-34 o f this report and is incorporated herein by reference.

(c) Description of Business

Information regarding the Company's principal products, by segment, and the business in general is presented below. Information regarding sales by theCompany's segments and geographic regions is set forth in Note 17 in the Notes to Consolidated Financial Statements on pages F-31 through F-34, and isincorporated herein by reference. No individual customer accounted for 10 percent or more of the Company's total net sales in 2010 , 2009 , or 2008 .

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Propel Segment

Hydrostatic Transmissions

Sauer-Danfoss designs, manufactures, and markets a range of closed circuit axial and bent axis piston hydrostatic transmissions for the propulsion ofmobile equipment in the Americas, Europe, and the Asia-Pacific region. High-power (typically over 50 HP) and medium-power (typically 25 to 50 HP)applications for hydrostatic transmissions manufactured by the Company include construction, road building, specialty, and agricultural mobile equipment.Light-power (typically 15 to 25 HP) and bantam-power (typically under 15 HP) applications for hydrostatic transmissions manufactured by the Companyinclude light agricultural and turf care mobile equipment. The Company manufactures these hydrostatic transmissions at its facilities in Ames, Iowa; Freeport,Illinois; Neumünster, Germany; Dubnica nad Váhom, Slovakia; Povazská Bystrica, Slovakia; Shanghai, China; and Osaka, Japan.

Open Circuit Piston Pumps

Sauer-Danfoss designs, manufactures, and markets open circuit piston pumps used to transform mechanical power from the engine to hydraulic powerfor the various functions of the vehicle. The advantages of open circuit piston pumps compared to other types of pumps, such as vane or gear pumps, are thehigh degree of control within the work function hydraulic system and the more efficient use of engine power. These products are designed and manufacturedat facilities in Ames, Iowa and Dubnica nad Váhom, Slovakia.

Work Function Segment

Low Speed High Torque Motors

Sauer-Danfoss designs, manufactures, and markets a complete line of geroller and gerotor motors used for both propel and work functions in all servedmarkets. These motors are manufactured at the Company's Ames, Iowa; Nordborg, Denmark; and Bielany Wroclawskie, Poland facilities.

Steering Units

Sauer-Danfoss designs, manufactures, and markets hydrostatic steering units to customers throughout the world. These steering units convert steeringwheel motion into hydraulic flow and pressure to provide steering motion for agricultural tractors, combines, turf care, marine, and earthmoving equipment.The Company manufactures steering units in Nordborg, Denmark; Wroclaw, Poland; and Pune, India.

Controls Segment

Electronic Components

Sauer-Danfoss designs, manufactures and markets a portfolio of electronic controls, including microprocessor-based controllers, intelligent displays,joysticks and electronic sensors through its electronic and mechatronic operations in Minneapolis, Minnesota; Älmhult, Sweden; Neumünster, Germany; andNordborg, Denmark. The software to integrate all these components into systems is also developed by Sauer-Danfoss and licensed to customers to let themdevelop their own solutions in an easy-to-use, graphical environment. Electronic controls and software are used by OEMs to network hydrostatictransmissions and work function hydraulics of mobile equipment into comfortable, safe and efficient systems.

Proportional Valves Group (PVG)

Sauer-Danfoss designs, manufactures and markets a variety of proportional valves to meet its customers' needs, ranging from very sophisticatedelectrohydraulic valves for highly sophisticated forestry and agricultural harvesting equipment, to simpler mechanically actuated valves for constructionequipment. These products are manufactured in facilities located in Povazská Bystrica, Slovakia; Nordborg, Denmark; and Easley, South Carolina.

Stand-Alone Businesses Segment

Open Circuit Gear Pumps and Motors

Sauer-Danfoss designs, manufactures, and markets a broad range of high-performance standard gear pumps and motors under the brand “TurollaOCG.”Gear pumps and motors are the most widely used type of mobile hydraulic pumps and motors in the industry. The Company manufactures gear pumps andmotors at its Bologna, Italy; Ames, Iowa; and Povazská Bystrica, Slovakia facilities.

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Cartridge Valves and HICs

Sauer Danfoss designs, manufactures and markets a broad portfolio of cartridge valves to meet its customers' needs for power control under the brand“Comatrol.” The business works directly with its customers in designing and manufacturing custom HICs that combine multiple cartridge valves into acomplete hydraulic control solution to regulate speed, control direction and modulate force. These valves range from very simple, low-cost mechanicalcartridges used on compact utility tractors, to complex electrohydraulically actuated valves for complex applications such as forestry and agriculturalharvesting equipment. The Company manufactures cartridge valves and HICs in facilities located in Reggio Emilia, Italy; Easley, South Carolina; andShanghai, China.

Directional Control Valves

Sauer-Danfoss designs, manufactures and markets directional control valves for compact utility tractors, construction equipment, material handling andmobile equipment in general. These products are manufactured in facilities located in Caxias do Sul, Brazil; and Pune, India.

Inverters

Sauer-Danfoss designs, manufactures and markets a broad range of high-performance inverters for mobile applications under the brand "SchwarzmüllerInverter." Inverters are used to drive alternating current (AC) motors and transform electrical power from a battery to mechanical power. Typical applicationsare traction, steering and hydraulic pump systems in material handling vehicles and other battery powered / electrical hybrid applications. The advantage ofinverter driven AC-systems compared to hydraulic solutions is the high degree of control and efficiency. These products are designed at the Company'sfacility in Kaiserslautern, Germany and manufactured in Almhült, Sweden and by contractors in Germany.

Light Duty Hydrostatic Transmissions

Sauer-Danfoss designs, manufactures and markets high-performance light duty hydrostatic transmissions, gear reduction drives, piston pumps, andwheel motors for both the consumer and commercial markets in the lawn and garden industry under the brand "Hydro-Gear." These products aremanufactured at its facilities in Sullivan, Illinois and Princeton, Kentucky.

Major Markets and Applications

Construction and Road Building Agriculture and Turf Care Material Handling andSpecialty VehiclesChip spreaders Combines Industrial lift trucksConcrete pumps Commercial wide-area, Logging equipmentConcrete saws walk-behind mowers Marine equipmentCrawler dozers Commercial zero-turn mowers Mining equipmentCrawler loaders Cotton pickers Oil field equipmentDitchers/trenchers Detasslers Railway maintenance vehiclesExcavators General turf maintenance Rough terrain fork liftsGrinders equipment Self-propelled boom aerial liftsLandfill compactors Harvesters Self-propelled scissor aerial liftsPavers Lawn and garden tractors Snow groomersPlaners Seeders SweepersRollers Sprayers Tree shakersSkid steer loaders Tractors Truck and bus fan drivesTransit mixers Windrowers Warehouse trucksUtility tractors Wheel loaders

General Characteristics

Sauer-Danfoss sells both standard and customized products, with most products being built to order. With respect to some of the most technologicallydemanding vehicles, such as those used in agriculture, forestry, construction, and road building, Sauer-Danfoss' engineers work closely with customers fromdesign through manufacture of the final product. The research and design phase, which is funded by the Company, can range from a few weeks to as long asfour to six years for a major application. Once the design has been accepted and the customer has placed an order, the manufacturing process typically takesonly a few days.

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Sauer-Danfoss operates 19 manufacturing facilities in the Americas, Europe, and the Asia-Pacific region. The Company's decentralized manufacturingcapabilities allow it to adapt its products to local market needs and to provide flexibility to meet customer delivery requirements. The Company sells anddistributes its products directly to large OEMs and serves smaller OEMs through Company-owned sales companies or independent distributors.

In accordance with standard industry practice for the mobile equipment industry, the Company warrants its products to be free from defects in materialand workmanship. The warranty period varies from one to three years, from the date of first use or from the date of original shipment of the product fromSauer-Danfoss. The Company's warranty expense has been two percent or less of net sales in each of the past three years.

Because many of its products are designed and developed in conjunction with its customers' design teams to fit their specific needs and to minimizeinventory levels, the Company primarily manufactures products to order. The Company typically machines components with long lead times according to asales forecast and machines certain unique components for specific customers according to firm orders. Inventories at the Company's manufacturing sitesconsist primarily of raw materials and machined iron housings and components. Limited amounts of assembled finished units are maintained in inventory atthe manufacturing sites. Some of the Company's sales locations maintain inventory that consists primarily of finished units manufactured specifically fordistribution to customers in those locations.

The Company does not accept orders subject to late delivery penalties. On occasion, the Company sells its products to government agencies, includingproducts used for military applications, but it does not design its products to meet specific government standards and usually only enters into contracts for thesupply of commercial products. There are no government contracts of material value to the Company.

Raw Materials

The Company purchases iron housings and components from various U.S., European, and Asian foundries and metal suppliers. The principal materialsused by the Company are iron, steel, brass, and aluminum. All materials used by the Company are generally available from a number of sources in quantitiessufficient to meet current requirements. The Company has a global supplier quality program that it uses to ensure all suppliers meet the Company's qualityexpectations.

Patents, Trademarks, and Licenses

The Company owns or licenses rights to 525 patents and trademarks relating to its business. While the Company considers its patents and trademarksimportant in the operation of its business and in protecting its technology from being used by competitors, its business is not dependent on any single patent ortrademark or group of related patents or trademarks.

To ensure worldwide availability of the Company's design of products, the Company has, in the past, licensed its technology to unaffiliated companies incertain countries. The Company does not currently have any such license agreements in place. The Company currently has license agreements in place as partof joint ventures in which the Company participates to manufacture or distribute the Company's technology.

Seasonality

Seasonal patterns in retail demand for agricultural, construction, road building, and turf care equipment sold by the Company's customers result invariations in the volume and mix of products sold by the Company during various times of the year. Historically, the Company has higher sales levels in thefirst half of the year, although this was not the case in 2010. Seasonal demand must be estimated in advance, and products must be manufactured inanticipation of such demand in order to achieve efficient utilization of labor and production resources.

Working Capital

The Company has historically funded its working capital requirements through cash flow from operations and its various credit facilities. As described inNote 8 in the Notes to the Consolidated Financial Statements on page F-16 through F-17 of this report, the Company has a credit facility in place whichallows it to borrow up to $500 million from Danfoss A/S, the Company's majority shareholder. The Company is reliant on Danfoss A/S as its primary externalsource of working capital financing.

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Backlog

At December 31, 2010 the Company's backlog (consisting of accepted but unfilled customer orders primarily scheduled for delivery during 2011 ) was$814 million, an increase of 63 percent from December 31, 2009 , excluding the impact of currency fluctuation. Historically, backlog comparisons have beena good indicator of the Company's future business level, but the value of those comparisons depends on the degree to which customer ordering behaviorremains constant from year to year. Customers can increase, cancel, or reschedule orders, so some customers place orders in excess of their actual needs inorder to ensure that adequate quantities will be available. In such a case, the customer may ultimately cancel a portion of its order.

Competition

The mobile hydraulics industry is very competitive. Sauer-Danfoss competes based on technological product innovation, quality, and customer service.The Company believes that to be successful over the long term, suppliers to mobile equipment manufacturers must have the ability to capitalize on thechanging needs of the industry by providing technological innovation, shorter product development times, and reduced manufacturing lead times at globallycompetitive price levels.

Propel Segment

The closed circuit hydrostatic transmission market is highly concentrated and intensely competitive. There are a small number of manufacturers ofhydrostatic transmissions with which the Company competes worldwide that are not captive suppliers of OEMs. These include Bosch Rexroth AG, EatonCorporation, and Linde AG. In addition, the Company competes with alternative products, such as mechanical transmissions, of other manufacturers.

The Company competes with a number of smaller companies that typically offer a single, specialized product on a more limited geographic basis as acomponent of a closed circuit hydrostatic transmission system.

In terms of global supply of closed circuit hydrostatic transmissions, the Company believes it is the world leader in terms of product range, market share,and geographic coverage. Only Bosch Rexroth AG offers similar geographic coverage.

Work Function Segment

Low speed high torque motors (LSHT) and hydrostatic steering units are provided to the market from more than ten competitors, the major ones beingEaton Corporation, Zhenjiang Hydraulic Components Manufacturing Co., Ltd., White Drive Products, Parker-Hannifin Corporation, Ognibene S.p.A., BoshRexroth AG and M+S Hydraulic. Sauer-Danfoss believes it occupies the number two position in the global market for LSHT. The Company believes it hasthe largest European market share for steering units. As steering systems' technical demands grow, Sauer-Danfoss is providing electronic control of steeringand complete electrical steering solutions to meet the growing demands of the steering market.

Controls Segment

In the electronic components market, which covers both propulsion and work function, there are only a few global competitors providing both thehydraulic and electronic elements of the system. The main competition comes from major OEMs, who produce electronic controls for their own use, or nichecompetitors who focus on a specific market segment, region, or technology. The Company believes it is well positioned to establish itself as a technologyleader, as there is no clearly established technology in this sector that is deemed to be an industry standard. It also believes it will experience higher thanaverage market growth levels as a result of the industry applying more electronics to meet the needs of new safety and emissions regulations.

The proportional valves group marketplace is fragmented among a number of suppliers, most of which are focused on limited valve types or flow ranges.Sauer-Danfoss provides a comprehensive line of proportional valves to meet the specific needs of its customers. Competitors who provide partial lines includeHAWE Hydraulics, Bucher Hydraulics, HUSCO International, and Walvoil S.p.A., plus many others. Full-line global proportional valves competitors arelimited to Parker-Hannifin Corporation, Bosch Rexroth AG, and Eaton Corporation. Sauer-Danfoss believes growth in this market will be higher than averagemarket levels related to its new product introductions and the implementation of new emissions regulations.

Stand-Alone Businesses Segment

The open circuit gear pumps and motors market is fragmented among a large number of suppliers of all types of products and with intensive competitionon pricing at the component level. There are approximately ten major companies that compete on a global basis, including Bosch Rexroth AG, Parker-Hannifin Corporation, Casappa S.p.A. and Haldex, and in Japan, Shimadzu Corporation. The supply of standard gear pumps and motors is particularlyfragmented among more than 50 companies worldwide. Most of these competitors have a limited product range and operate in a limited geographic market.

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The control valves marketplace is fragmented among a large number of suppliers, most of which are focused on limited valve types or flow ranges.Sauer-Danfoss provides a comprehensive line of HICs, cartridge and directional control valves to meet the specific needs of its customers. Competitors whoprovide partial lines include HydraForce, HUSCO International, Sun Hydraulics Corporation, and Walvoil S.p.A., plus many others. Complete global controlvalve line competitors are limited to Parker-Hannifin Corporation, Bosch Rexroth AG, and Eaton Corporation.

The inverters market is dominated by Zapi. Other relevant competitors are Curtis and Danaher, while the biggest vehicle manufacturers in the material

handling market such as Kion and Jungheinrich design and produce their own inverters. Sauer-Danfoss' unique selling point is the full graphical

programmability of its inverters which gives distributors and customers a high flexibility to design their own applications and opens new distribution channels

and markets .

The hydrostatic drive systems market for the lawn and garden industry is highly concentrated and intensely competitive. In addition, the Companycompetes with alternative products, such as mechanical transmissions of other manufacturers. With respect to global supply of small-sized hydrostatictransmissions, the Company believes it is the world leader in terms of product range and market share.

Research and Development

The Company's research and development expenditures during 2010 , 2009 , and 2008 were $51.6 million, $61.4 million, and $82.9 million,respectively.

Environmental Matters

In all countries in which it operates, the Company is subject to environmental laws and regulations concerning emissions to air, discharge to waterways,and the generation, handling, storage, transportation, treatment, and disposal of waste materials. These laws and regulations are constantly evolving, and it isimpossible to predict accurately the effect they will have on the Company in the future. The regulations are subject to varying and conflicting interpretationsand implementation. In some cases, compliance can only be achieved by additional capital expenditures. The Company cannot accurately predict what capitalexpenditures, if any, may be required to comply with applicable environmental laws and regulations in the future; however, the Company does not currentlyestimate that any future capital expenditures for environmental control facilities will be material. The Company is not currently subject to any governmentalremediation order, nor is the Company aware of any environmental issues that would have a materially adverse effect on the Company.

Employees

As of December 31, 2010 , 2009 , and 2008 the Company had approximately 6,000, 6,100, and 9,600 employees, respectively. Of its full-time employeesat December 31, 2010 , approximately 1,900 were located in the Americas with the remainder located in Europe and the Asia-Pacific region. From time totime, the Company also retains consultants, independent contractors, and temporary and part-time workers.

Financial Information about Geographic Areas

Information regarding the Company's net sales and long-lived assets by geographic area is set forth in Note 17 in the Notes to Consolidated FinancialStatements on pages F-31 through F-34 o f this report, and is incorporated herein by reference.

Available Information

The Company maintains an internet website and the address of that site is http://www.sauer-danfoss.com . The Company provides access to its annualreport on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant toSection 13(a) of the Securities Exchange Act of 1934 through its internet website as soon as reasonably practicable after the Company electronically files suchmaterial with, or furnishes it to, the Securities and Exchange Commission (SEC). The SEC maintains an internet website that contains reports, proxy andinformation statements, and other information regarding issuers that file electronically with the SEC. The address of the SEC site is http://www.sec.gov .

Item 1A. Risk Factors.

The Company's business, financial condition, results of operations and cash flows can be affected by a number of factors, including but not limited tothose set forth below and elsewhere in this annual report on Form 10-K, any one of which could cause actual results to vary materially from recent results orfrom anticipated future results.

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Worldwide Economic Conditions

The worldwide economy, which faced significant disruptions and widespread recession during 2008 and 2009, showed signs of improvement in 2010.The Company's sales growth over the course of 2010 was aided by these improving conditions. It remains impossible to forecast, however, whether theworldwide economy will continue to improve during 2011 or may slip back into a recessionary state. Economic indicators are, at best, mixed on both globaland regional levels. If the worldwide economy indeed declines, or if its rate of improvement slows, during 2011, the effects on the Company's business,financial condition, and results of operations could be material and adverse.

The economic downturn that, in 2008 and 2009, adversely affected the Company in a number of ways, should be viewed as a cautionary sign for thefuture. If the global economy were to experience another downturn, the Company's performance and financial condition could suffer as it did during thoseyears.

One feature of the recession of 2008 and 2009 that had a particularly significant impact on the Company was the extreme contraction of credit markets.Although there are some signs that global credit markets are becoming somewhat more accessible, continued tight credit markets could have a material impacton the Company's customers and suppliers and their ability to finance their operations, which could result in a decrease in, or deferral of, orders for theCompany's products or an increase in the Company's cost of production. Depressed demand for the Company's products could result in decreased revenues,profitability and cash flows and could impair the Company's ability to maintain operations and fund obligations to others.

Another feature of the recent worldwide recession that had a material impact on the Company's business was the response of central banking authoritiesand national governments to the economic crisis. Whether or not the global economy continues to show signs of improvement, changes in U.S., European, andother nations' fiscal and monetary policies and laws affecting banking, liquidity, exchange rates, taxes, and governmental spending levels may have a materialand adverse effect on the Company's business, financial condition, and results of operations.

Avoidance of Credit Default; Dependence on Affiliate Borrowing

The Company has a Credit Agreement with Danfoss A/S, the Company's majority stockholder, under which the Company may borrow up toapproximately $500 million. The Credit Agreement consists of a revolving credit facility that matures in September 2013 and two term loans that requirerepayment in September 2015. In borrowing funds from Danfoss A/S, the Company is dependent on Danfoss A/S for the Company's working capital andother funding needs. If Danfoss A/S were unable to borrow or otherwise generate sufficient funds to meet the Company's borrowing requirements or were tobecome unwilling to continue lending to the Company on reasonable terms, the Company has the right to seek alternative financing sources. If suchalternative funding were not available on reasonable terms, the Company's business, results of operations, and financial position could be adversely affected.

Goodwill and Long-Lived Assets Impairment

If the price of the Company's stock were to decline to the point that its market capitalization were lower than its carrying value, the Company may berequired to perform interim impairment tests on goodwill or other long-lived assets. There may be other triggering events that indicate that the carryingamount of goodwill or long-lived assets may not be recoverable from future cash flows. If the Company determines that any goodwill or other long-lived assetamounts need to be written down to fair values, this could result in a charge that may be material to the Company's operating results and financial condition.

International Operations

The Company depends on the strength of the economies in various parts of the world, particularly in the U.S., Europe, and the Asia-Pacific region. As aresult of this worldwide exposure, net revenue and profitability may be harmed as a result of economic conditions in the major markets in which the Companyoperates, including, but not limited to, recessions, inflation and deflation, general weakness in the agriculture, construction and specialty markets, changes ingovernmental laws and policies, government embargoes or foreign trade restrictions, duties and tariffs, import and export controls, and changes in consumerpurchasing power.

Technology Change

The hydraulic industry and markets for component parts of mobile hydraulics are subject to technological change, evolving industry standards, changingcustomer requirements and improvements in and expansion of product offerings. Although the Company believes that it has the technological capabilities toremain competitive, technological advances or developments by competitors or others could result in the Company needing to make significant capitalexpenditures in order to remain competitive and to avoid material adverse effects on its business, financial condition and results of operations.

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Common Business System

The Company has implemented a common business system at the majority of its locations. Any significant problems incurred related to operation of thesystem may delay or stop manufacturing and hinder the Company's ability to ship product in a timely manner or affect the Company's ability to accessfinancial information. These problems could result in the loss of customers, a decrease in revenue, or significant costs to correct the problem.

Raw Material Availability

The Company purchases raw materials and component parts from suppliers to be used in the manufacture of products. During the worldwide economicrecession, many of the Company's raw material suppliers reduced their output. As the worldwide market has begun to improve in recent months, suppliershave increased production. In the event of a short-term substantial increase in demand, the Company may experience price increases and difficulties inpurchasing raw materials.

Pricing and Competitive Pressures from OEM Customers

A majority of the Company's sales are directly to OEM customers. OEM customers continue to use their positions as volume purchasers in the mobilehydraulics market to obtain preferential pricing and to obtain substantial quality assurance protection from the Company and other suppliers.

Currency Exchange Rates

The Company has a number of manufacturing sites throughout the world and sells products in several countries other than those where the product ismanufactured. As a result, the Company has exposure to changing exchange rates between the various currencies in its customers' countries and the currenciesin which the Company's manufacturing facilities are located. The Company's most significant foreign currency exposures are the euro, Japanese yen, Brazilianreal, Polish zloty, British pound, Chinese yuan and Danish kroner. Exchange rate fluctuations between these currencies and against the U.S. dollar or eurocould adversely affect the Company's results of operations. The Company enters into forward contracts to reduce the impact of currency fluctuations on cashflows related to forecasted sales denominated in currencies other than the functional currency of the selling location.

Cyclicality: Risks Associated with General Economic Conditions

The capital goods industry in general, and the mobile hydraulics industry in particular, are subject to economic cycles. Cyclical downturns had a materialadverse effect on the demand for the Company's products in recent years. Future cyclical downturns may negatively impact the Company's business, financialcondition, and results of operations. Demand for the Company's products is dependent upon the general condition of the off-highway mobile equipmentindustry which may be affected by numerous factors, including levels of construction activity, weather conditions, interest rates and access to financing. TheCompany's results of operations are also subject to price competition and the cost of supplies and labor, both of which are affected by general economicconditions. The Company derives substantial sales from cyclical industries, including the turf care, material handling, construction and agricultural equipmentindustries.

Income Tax Estimates

The Company is subject to income taxes in the U.S. and numerous non-U.S. jurisdictions. Significant judgment is required in determining the Company'sworldwide provision for income taxes. In the ordinary course of business, there are many transactions and calculations where the ultimate tax determination isuncertain. The Company is periodically under audit by tax authorities. Although management believes its tax estimates are reasonable, the final outcome oftax audits and any related litigation could be materially different than that which is reflected in historical income tax provisions and accruals. If the outcomeof a given tax audit or related litigation is materially different from the Company's estimates, the determination could result in material differences betweenthe Company's originally reported income tax provision or net income (loss) and the final reported financial results.

Catastrophic Events

Unforeseen events, including war, terrorism and other international conflicts, public health issues, and natural disasters such as earthquakes, hurricanesor other adverse weather and climate conditions, whether occurring in the U.S. or abroad, could disrupt the Company's operations, disrupt the operations ofsuppliers or customers, or result in political or economic instability. These events could reduce demand for hydraulic and electronic products and make itdifficult or impossible for the Company to manufacture products, deliver products to customers, or to receive products from suppliers.

The foregoing list is not exhaustive. There can be no assurance that the Company has correctly identified and appropriately assessed all factors affectingthe Company or that the publicly available and other information with respect to these matters is complete and correct. Additional risks and uncertainties notpresently known to the Company or that are currently believed to be immaterial also may adversely impact the Company's business. Should any risks oruncertainties develop into actual events, these

9

developments could have a material adverse effect on the Company's business, financial condition, and results of operations.

Item 2. Properties.

Sauer-Danfoss Inc. conducts its manufacturing operations at 19 locations; six in the United States, two each in Slovakia, Poland and Italy, and one eachin Brazil, China, Denmark, Germany, India, Japan, and Sweden. The following table sets forth certain information relating to the Company's principalmanufacturing facilities:

Location Segment that Uses the Facility Approx.Area inSq. Ft.

Owned/Leased

United States Ames, Iowa Propel, Work Function and Stand-Alone Businesses 359,100 OwnedSullivan, Illinois Stand-Alone Businesses 205,000 OwnedFreeport, Illinois Propel 197,000 OwnedEasley, South Carolina Controls and Stand-Alone Businesses 184,000 OwnedMinneapolis, Minnesota Controls 75,000 LeasedPrinceton, Kentucky Stand-Alone Businesses 68,000 OwnedSouth America Caxias do Sul, Brazil Stand-Alone Businesses 90,000 LeasedEurope Nordborg, Denmark Work Function and Controls 734,200 LeasedNeumünster, Germany Propel and Controls 421,500 OwnedPovazská Bystrica, Slovakia Propel, Controls and Stand-Alone Businesses 386,900 OwnedDubnica nad Váhom, Slovakia Propel 249,700 OwnedBielany Wroclawskie, Poland Work Function 223,000 LeasedWroclaw, Poland Work Function 126,000 OwnedBologna, Italy Stand-Alone Businesses 85,000 OwnedReggio Emilia, Italy Stand-Alone Businesses 76,500 LeasedÄlmhult, Sweden Controls and Stand-Alone Businesses 50,000 LeasedIndia Pune, India Work Function and Stand-Alone Businesses 63,600 OwnedAsia Shanghai, China Propel and Stand-Alone Businesses 105,000 LeasedOsaka, Japan Propel 120,000 Leased

Total 3,819,500

Item 3. Legal Proceedings.

The Company was named as a defendant in four putative stockholder class action complaints (collectively, the Lawsuits) challenging the proposal byDanfoss Acquisition Inc., a wholly owned subsidiary of Danfoss A/S (Danfoss), to make a tender offer to purchase all of the outstanding shares of Companycommon stock not presently held, directly or indirectly, by Danfoss (Proposed Tender Offer). When the Proposed Tender Offer was not consummated, theLawsuits were dismissed as moot. The only remaining issue is resolution of the application by certain plaintiffs in the Delaware Chancery Court for attorneys'fees and expenses in the amount of $0.8 million. The Company is vigorously opposing the plaintiffs' application and a ruling by the Court is expected in thenext several months. It is not possible at this time to predict the amount, if any, of legal fees and expenses that might be awarded.

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From time to time, the Company is involved in other legal matters in the ordinary course of its business. The Company intends to defend itselfvigorously against all such claims. It is the Company's policy to accrue for amounts related to lawsuits brought against it if it is probable that a liability hasbeen incurred and an amount can be reasonably estimated. Although the outcome of such matters cannot be predicted with certainty and no assurances can begiven with respect to such matters, the Company believes that the outcome of those ordinary-course matters in which it is currently involved will not have amaterially adverse effect on its results of operations, liquidity, or financial position.

EXECUTIVE OFFICERS OF THE COMPANY

The following table sets forth certain information regarding the executive officers of the Company:

Name Age Position YearAppointedSven Ruder(1) 54 President and Chief Executive Officer 2009Jesper V. Christensen(2) 41 Executive Vice President and Chief Financial Officer, Treasurer 2009C. Kells Hall(3) 62 Executive Vice President and President Propel Division 2009Wolfgang Schramm(4) 56 Executive Vice President and President Controls Division 2007Marc A. Weston(5) 42 Executive Vice President and Chief Marketing Officer 2010Anne Wilkinson(3) 45 Executive Vice President - Human Resources 2010Kenneth D. McCuskey(3) 56 Vice President and Chief Accounting Officer, Secretary 2000

(1) Prior to joining the Company, Mr. Ruder was employed as President of the Motion Controls Division of Danfoss A/S, the majoritystockholder of the Company.

(2) Prior to joining the Company, Mr. Christensen was employed as Vice President, Finance, IT & HR in the Motion Controls Division ofDanfoss A/S, the majority stockholder of the Company.

(3) These executive officers have served in various capacities with the Company or its subsidiaries for more than the past five years.

(4) Prior to joining the Company, Mr. Schramm was employed by Visteon Corporation as Executive Director Advanced Technology.

(5) Prior to joining the Company, Mr. Weston was employed by The Timken Company as Vice President Strategic Planning.

Item 4. Reserved

11

PART II

Item 5. Market for the Company's Common Stock, Related Stockholder Matters and Company Purchases of Common Stock.

Market and Dividend Information

The Company's Common Stock is traded on the New York Stock Exchange. As of March 1, 2011 there were 163 stockholders of record.

The Company historically paid a quarterly dividend. Quarterly dividends are subject to Board of Directors approval. On March 13, 2009 the Board ofDirectors voted to suspend the Company's quarterly dividend indefinitely, beginning with the dividend that would ordinarily have been declared during thefirst quarter of 2009. The Board of Directors reevaluates the payment of dividends on an ongoing basis.

The following table sets forth the high and low prices on the New York Stock Exchange for the Company's Common Stock since January 1, 2009, andthe quarterly cash dividends declared in 2010 and 2009 :

1st 2nd 3rd 4th Full Year2010 High $13.30 $18.24 $21.68 $32.88 $ 32.88 Low $11.10 $12.16 $11.22 $20.58 $ 11.10 Dividends $ — $ — $ — $ — $ — 2009 High $10.13 $ 7.08 $ 8.19 $12.68 $ 12.68 Low $ 2.43 $ 2.37 $ 4.50 $ 6.71 $ 2.37 Dividends $ — $ — $ — $ — $ —

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Performance Graph

The following graph shows a comparison of the cumulative total returns from December 31, 2005 to December 31, 2010 , for the Company, the Russell2000 Index, the Morningstar Diversified Industrials Index ("Morningstar Group Index"), and the Hemscott, Inc.—Diversified Machinery Index ("HemscottGroup Index"). This year the Morningstar Diversified Industrials Index has been included because the Company was notified that the index used in prioryears, the Hemscott Group Index, will soon no longer be available. Both the Morningstar Group Index and the Hemscott Group Index are published indexesthat the Company believe provide good representations of the industry.

The graph assumes that $100 was invested on December 31, 2005 in the Company's common stock, the Russell 2000 Index, and the Morningstar GroupIndex and the Hemscott Group Index, the last two of which are peer group indexes, and that all dividends were reinvested.

COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURNAMONG SAUER-DANFOSS INC.,

RUSSELL 2000 INDEX, MORNINGSTAR GROUP INDEX AND HEMSCOTT GROUP INDEX

ASSUMES $100 INVESTED ON 12/31/05ASSUMES DIVIDEND REINVESTMENT

FISCAL YEAR ENDING 12/31/2010

13

Equity Compensation Plan Information

The following table summarizes, as of December 31, 2010 , information about compensation plans under which equity securities of the Company areauthorized for issuance:

Plan Category

Number of Securities tobe Issued upon Exerciseof Outstanding Options,

Warrants and Rights(a)

Weighted-AverageExercise Price of

Outstanding Options,Warrants and Rights

(b)

Number of Securities RemainingAvailable for Future Issuanceunder Equity CompensationPlans (Excluding Securities

Reflected in Column(a))(c)

Equity compensation plans approved by security holders 76,486 $ — 3,380,516

The Company does not have any equity compensation plans that were not approved by security holders. Refer to Note 13 in the Notes to theConsolidated Financial Statements on pages F-28 through F-29 of this report for a description of the equity compensation plans.

Column (a) includes only performance units that have vested but the payout of which has been deferred. Subsequent to December 31, 2010 , theCompany's Compensation Committee determined that the performance units granted in 2008 would vest at 0.0 percent of the target levels because theperformance criteria established when such units were awarded had not been met. Therefore no amounts are included above for the 2008 performance units.No performance units were granted in 2009. In 2010, the Company awarded only cash-based awards, so they are not included in this table.

Column (c) includes 3,380,516 shares available for issuance under the Company's 2006 Omnibus Incentive Plan. The plan permits the Company to issuecommon stock at times other than upon the exercise of options, warrants, or rights; for example, issuance in the form of restricted stock grants.

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Item 6. Selected Financial Data.

SELECTED FINANCIAL DATA

2010 2009 2008 2007 2006 (in millions except per share)Operating Data: Net sales $1,640.6 $1,159.0 $2,090.5 $1,972.5 $1,739.1 Gross profit 498.1 128.0 435.6 427.7 396.8 Selling, general and administrative 195.5 209.7 258.5 233.8 215.6 Research and development 51.6 61.4 82.9 70.6 61.9 Impairment charges — 50.8 58.2 — 1.5 Loss on sale of businesses and asset disposals 7.6 16.4 9.6 9.4 1.7 Total operating expenses 254.7 338.3 409.2 313.8 280.7 Total interest expense, net 49.4 48.4 24.6 22.7 17.8 Net income (loss) attributable to Sauer-Danfoss Inc. 213.4 (345.8) (29.1) 47.2 54.0 Per Share Data: Income (loss) per common share, basic $ 4.41 $ (7.15) $ (0.60) $ 0.98 $ 1.13 Income (loss) per common share, diluted $ 4.40 $ (7.15) $ (0.60) $ 0.98 $ 1.12 Cash dividends declared per share $ — $ — $ 0.72 $ 0.72 $ 0.60 Weighted average basic shares outstanding 48.4 48.3 48.2 48.1 47.7 Weighted average diluted shares outstanding 48.5 48.3 48.2 48.3 48.2 Balance Sheet Data: Inventories $ 201.0 $ 177.6 $ 325.5 $ 318.8 $ 272.3 Property, plant and equipment, net 408.1 513.5 598.4 562.8 504.0 Total assets 1,128.2 1,068.3 1,467.7 1,500.4 1,307.1 Total debt (1) 281.5 533.2 491.4 444.0 349.6 Stockholders' equity 369.1 154.6 477.9 586.0 515.5 Debt to total capital 43.3% 77.5% 50.7% 43.1% 40.4%Other Data: Backlog (at year-end) $ 814.2 $ 509.5 $ 743.7 $ 921.4 $ 631.0 Depreciation and amortization 97.3 117.1 113.0 102.3 95.7 Capital expenditures 26.2 43.0 198.6 135.6 116.2 EBITDA (2) 344.2 (89.9) 175.6 212.6 207.6 Cash flows from (used in): Operating activities 269.3 86.8 183.5 98.1 167.9 Investing activities (18.0) (42.2) (187.5) (122.2) (109.3)Financing activities (249.2) (24.7) 4.7 22.1 (45.0)

(1) Total debt includes notes payable and bank overdrafts, long-term debt due within one year, and long-term debt.

(2)

EBITDA represents net income plus net interest expense, income tax expense, depreciation and amortization, long-lived asset impairment charge andnoncontrolling interest. The impairment charge is included as it will reduce depreciation in future years. EBITDA may not be comparable to similarlytitled measures reported by other companies. While EBITDA should not be construed as a substitute for operating income or a better indicator ofliquidity than cash flow from operating activities, which are determined in accordance with accounting principles generally accepted in the UnitedStates, it is included herein to provide additional information as management of the Company believes it provides an indication with respect to theability of Sauer-Danfoss to meet its future debt service,

15

capital expenditures, and working capital requirements. The following table further demonstrates how EBITDA is derived from cash flows from operatingactivities:

2010 2009 2008 2007 2006Cash flows from operating activities $269.3 $ 86.8 $183.5 $ 98.1 $167.9 Increase (decrease) in working capital, excluding the effects of acquisitions Accounts receivable, net 63.8 (91.4) (71.7) 38.5 24.5 Inventories 28.5 (153.4) 16.8 36.6 14.2 Prepaid and other current assets 8.1 5.0 7.9 11.1 6.1 Accounts payable (77.6) 54.2 14.5 (11.0) (27.2)Accrued liabilities (16.6) 20.7 (23.6) 1.5 (14.0)Deferred income taxes and other 70.5 (121.2) 9.5 (3.7) 1.3 Interest expense, net 49.4 48.4 24.6 22.7 17.8 Income tax (51.2) 61.0 14.1 18.8 17.0

EBITDA $344.2 $(89.9) $175.6 $212.6 $207.6

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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Safe Harbor Statement

This Management's Discussion and Analysis of Financial Condition and Results of Operations, as well as other portions of this annual report on Form10-K, contain certain statements that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directlyrelate to any historical or current fact. All statements regarding future performance, growth, sales and earnings projections, conditions or developments areforward-looking statements. Words such as “anticipates,” “in the opinion,” “believes,” “intends,” “expects,” “may,” “will,” “should,” “could,” “plans,”“forecasts,” “estimates,” “predicts,” “projects,” “potential,” “continue,” and similar expressions may be intended to identify forward-looking statements.

Actual future results may differ materially from those described in the forward-looking statements due to a variety of factors. Readers should bear inmind that past experience is never a perfect guide to anticipating actual future results. Risk factors affecting the Company's forward-looking statementsinclude, but are not limited to, the following: general, worldwide economic conditions, including the relative strength or weakness of the commercial andpublic-sector construction markets, the level of interest rates, crude oil prices, commercial and consumer confidence, and currency exchange rates; specificeconomic conditions in the agriculture, construction, road building, turf care, material handling and specialty vehicle markets and the impact of suchconditions on the Company's customers in such markets; the cyclical nature of some of the Company's businesses; the ability of the Company to win newprograms and maintain existing programs with its original equipment manufacturer (OEM) customers; the highly competitive nature of the markets for theCompany's products as well as pricing pressures that may result from such competitive conditions; the continued operation and viability of the Company'ssignificant customers; the Company's execution of internal performance plans; difficulties or delays in manufacturing; the effectiveness of the Company'scost-reduction and productivity improvement efforts; the success of the Company's transition from managing in an environment of shrinking sales to one ofsales growth; competing technologies and difficulties entering new markets, both domestic and foreign; changes in the Company's product mix; future levelsof indebtedness and capital spending; the ability and willingness of Danfoss A/S, the Company's majority stockholder, to lend money to the Company atsufficient levels and on terms favorable enough to enable the Company to meet its capital needs; the Company's ability to access the capital markets ortraditional credit sources to supplement or replace the Company's borrowings from Danfoss A/S if the need should arise; the Company's ability over time toreduce the relative level of debt compared to equity on its balance sheet; claims, including, without limitation, warranty claims, field recall claims, productliability claims, charges or dispute resolutions; the ability of suppliers to provide materials as needed and the Company's ability to recover any priceincreases for materials in product pricing; the Company's ability to attract and retain key technical and other personnel; labor relations; the failure ofcustomers to make timely payment, especially in light of the persistence of tight credit markets; any inadequacy of the Company's intellectual propertyprotection or the potential for third-party claims of infringement; credit market disruptions and significant changes in capital market liquidity and fundingcosts affecting the Company and its customers; sovereign debt crises, in Europe or elsewhere, and the reaction of other nations to such crises; energy prices;the impact of new or changed tax and other legislation and regulations in jurisdictions in which the Company and its affiliates operate; actions by the U.S.Federal Reserve Board and the central banks of other nations; actions by other regulatory agencies, including those taken in response to the global creditcrisis; actions by rating agencies; changes in accounting standards; worldwide political stability, including developments in the Middle East; the effects ofterrorist activities and resulting political or economic instability; natural catastrophes; U.S. military action overseas; and the effect of acquisitions,divestitures, restructurings, product withdrawals, and other unusual events.

The Company cautions the reader that this list of cautionary statements and risk factors is not exhaustive. The Company expressly disclaims anyobligation or undertaking to release publicly any updates or changes to these forward-looking statements to reflect future events or circumstances.

About the Company

Sauer-Danfoss Inc. and subsidiaries (the Company) is a worldwide leader in the design, manufacture, and sale of engineered hydraulic and electronicsystems and components that generate, transmit and control power in mobile equipment. The Company's products are used by original equipmentmanufacturers (OEMs) of mobile equipment, including construction, road building, agricultural, turf care, material handling, and specialty equipment. TheCompany designs, manufactures, and markets its products in the Americas, Europe, and the Asia-Pacific region, and markets its products throughout the restof the world either directly or through distributors.

17

Executive Summary of 2010 Compared to 2009

The nature of the Company's operations as a global producer and supplier in the fluid power industry means the Company is impacted by changes inlocal economies, including currency exchange rate fluctuations. In order to gain a better understanding of the Company's base results, a financial statementuser needs to understand the impact of those currency exchange rate fluctuations. The following table summarizes the change in the Company's results fromoperations by separately identifying changes due to currency fluctuations and the underlying change in operations from 2009 to 2010 . This analysis is moreconsistent with how the Company's management internally evaluates results.

(in millions) 2009 Currency fluctuations Underlying change 2010Net Sales $1,159.0 $ (4.5) $ 486.1 $1,640.6 Gross Profit 127.9 (6.0) 376.2 498.1 % of Net Sales 11.0 % 30.4%Selling, general and administrative 209.7 (1.7) (12.5) 195.5 Research and development 61.4 (0.7) (9.1) 51.6 Impairment charges 50.8 — (50.8) — Loss on sale of businesses and asset disposals 16.4 (0.2) (8.6) 7.6

Total operating costs 338.3 (2.6) (81.0) 254.7

Operating income (loss) (210.4) (3.4) 457.2 243.4 % of Net Sales (18.2)% 14.8%Interest expense, net (48.4) 0.6 (1.6) (49.4)Loss on early retirement of debt (15.8) — 13.4 (2.4)Other, net 3.3 0.5 (0.3) 3.5

Income (loss) before income taxes (271.3) (2.3) 468.7 195.1 % of Net Sales (23.4)% 11.9%Income tax (61.0) (0.2) 112.4 51.2

Net income (loss) (332.3) (2.5) 581.1 246.3 Net income attributable to noncontrolling interest, net of tax (13.5) (0.3) (19.1) (32.9)

Net income (loss) attributable to Sauer-Danfoss Inc. $ (345.8) $ (2.8) $ 562.0 $ 213.4

Net sales for the year ended December 31, 2010 increased 42 percent compared to the year ended December 31, 2009 , excluding the effects of currency,and 43 percent excluding the effects of currency and the 2009 divestiture of the electric drives business. Net sales increased in all regions and segments.Excluding the impacts of currency and divestitures, sales increased 68 percent in Asia-Pacific, 46 percent in the Americas and 30 percent in Europe. Sales inthe Propel segment were up 55 percent, followed by increases of 39 percent in the Work Function segment, 33 percent in the Controls segment, and 29percent in the Stand-Alone Businesses segment.

Gross profit increased significantly during the year ended December 31, 2010 , excluding the impact of currency, due to increased sales volume,procurement savings of $16.3 million, fixed cost reductions including depreciation of $20.7 million, and reduced field recall costs of $11.5 million. Grossprofit was negatively impacted in 2009 by inventory valuation allowances of $13.8 million and restructuring charges of $5.8 million related to the closure ofthe Hillsboro, Oregon; Lawrence, Kansas; and Odense, Denmark locations. Partially offsetting the positive impact of increased sales and cost reductions in2010 were additional restructuring costs of $3.1 million related to the closure of the Lawrence facility.

Selling, general and administrative costs decreased 6 percent during 2010 when compared to the same period in 2009 , excluding the effects of currency.In 2009 the Company incurred severance costs of $18.2 million due to headcount reductions, as well as $4.5 million of restructuring costs related to theclosure of the Hillsboro location and the exit from the electric drives business. The reduction in expenses related to these items in 2009 was partially offset in2010 by additional restructuring costs of $0.5 million related to the closure of the Lawrence facility, costs of $3.5 million related to a stock tender offerinitiated by Danfoss Acquisition, Inc., incentive plan costs of $13.2 million, and a $1.5 million pension settlement with a former executive. Research anddevelopment costs decreased 15 percent excluding the effects of currency due to cost reduction efforts in light of the recent economic downturn. TheCompany reported goodwill impairment charges of $50.8 million during the first quarter of 2009 related

18

to the valves reporting unit.

During 2009 the Company incurred costs of $6.3 million related to the sale of its alternating current (AC) electric motor business for the materialhandling market, as well as a loss of $2.7 million on the sale of its steering column business in Kolding, Denmark. These activities were part of theCompany's plan to divest of product lines that do not fit the Company's long-term strategic direction. In 2010 the Company incurred additional costs of $4.4million related to the exit from the AC motor product line and $1.1 million related to the sale of the steering column business in Kolding, Denmark. Inaddition, the Company recognized costs of $2.3 million related to a loss on sale of fixed assets and write-down of the building in Lawrence, Kansas. Partiallyoffsetting these costs in 2010 was a gain on sale of equipment of $1.1 million.

The Company refinanced various credit agreements during 2009, which resulted in a $15.8 million loss on early retirement of debt. This loss consisted of$8.1 million of prepayment penalties, $2.0 million to settle outstanding interest rate swap agreements related to debt repaid, and $5.7 million to write-offunamortized deferred financing costs. Further refinancing activities in 2010 resulted in a $2.4 million loss on early retirement of debt consisting ofprepayment penalties of $1.7 million and $0.7 million related to the write-off of unamortized deferred financing costs.

Operating Results— 2010 Compared to 2009

Sales Growth by Market

The following table summarizes the Company's sales growth by market. The table and following discussion is on a comparable basis, which excludes theeffects of currency fluctuations.

Americas Asia-Pacific Europe Total

$ Change % Change $ Change % Change $ Change % Change $ Change % Change

Agriculture/Turf Care $ 74.7 26% $ 0.1 1 % $ 27.3 17% $ 102.1 22%Construction/Road Building 61.8 101 85.5 146 56.7 77 204.0 105 Specialty 26.5 77 (12.5) (34) 33.5 19 47.5 19 Distribution 58.8 54 46.7 67 27.0 34 132.5 51

Agriculture/Turf Care

Sales into the agriculture/turf care market showed a strong increase in the Americas and Europe during the year ended December 31, 2010 compared to2009 , while sales in the Asia-Pacific region remained level. The agricultural market in the Americas showed improvement due to improving commodityprices, while sales in Brazil benefited from a strong sugar-cane market. In Europe, many customers have ceased inventory reduction efforts and sales are morein line with market demand. The strong demand for tractors with hydraulic steering in India, which is reported as part of Europe, has contributed to the salesgrowth in the European market. Sales in the turf care market improved due to growing consumer confidence.

Construction/Road Building

The construction/road building markets experienced strong sales increases in all regions during the year ended December 31, 2010 compared to 2009 .The Asia-Pacific region had the strongest sales growth at 146 percent, largely due to low sales in 2009 as a result of customers' efforts to reduce inventorylevels. Other factors driving the strong sales in the Asia-Pacific region included an expanding demand for transit mixers in China, as well as favorable roadbuilding markets and increased demand for rollers. Sales in the Americas and Europe also showed strong improvement as customers are no longer working toreduce inventory levels and equipment production corresponds with increased demand.

Specialty

Specialty vehicles are comprised of a variety of markets including forestry, material handling, marine, waste management and waste recycling. Overallsales into the specialty vehicle market increased 13 percent compared to 2009 . Sales in the Americas benefited from an increased demand for aerial lifts and astrong overall market in Brazil. Sales in Europe increased due to the recovery of the forestry and mining markets, as well as increased demand for telehandlersand truck-mounted cranes. Sales in China continue to suffer as a result of a saturated railway market resulting in lower sales to the carrier business for railroadconstruction.

Distribution

Products related to all of the above markets are sold to distributors, who then serve smaller OEMs.

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Order Backlog

The following table shows the Company's order backlog and orders written activity for 2009 and 2010 , separately identifying the impact of currencyfluctuations.

(in millions) 2009 Currencyfluctuation Underlying

change 2010

Backlog at December 31 $509.5 $ (14.3) $ 319.0 $ 814.2 Orders written 913.3 (4.8) 1,047.3 1,955.8

Total order backlog at the end of 2010 was $814.2 million, compared to $509.5 million at the end of 2009 . On a comparable basis, excluding the impactof currency fluctuation, order backlog increased 63 percent compared to 2009 . New sales orders written for 2010 were $1,955.8 million, an increase of115 percent compared to 2009 , excluding the impact of currency fluctuations.

Business Segment Results

The following discussion of operating results by reportable segment relates to information as presented in Note 17 in the Notes to Consolidated FinancialStatements. Segment income is defined as the respective segment's portion of the total Company's net income, excluding net interest expense, income taxes,and noncontrolling interest. Propel products include hydrostatic transmissions and related products that transmit the power from the engine to the wheel topropel a vehicle. Work Function products include steering motors and motors that transmit power for the work functions of the vehicle. Controls productsinclude electrohydraulic controls, microprocessors, and valves that control and direct the power of a vehicle. In 2010 the Company added an additionalreportable segment, Stand-Alone Businesses, which include open circuit gear pumps and motors, cartridge valves and HICs, directional control valves,inverters and light duty hydrostatic transmissions that transmit, control and direct the power of a vehicle, but are marketed under their own names and operateas independent businesses.

The following table provides a summary of each segment's net sales and segment income, separately identifying the impact of currency fluctuationsduring the year.

(in millions) 2009 Currencyfluctuation Underlying

change 2010

Net sales Propel $463.6 $ 0.2 $ 253.4 $717.2 Work Function 233.8 (4.0) 90.9 320.7 Controls 185.5 (2.7) 60.4 243.2 Stand-Alone Businesses 276.1 2.0 81.4 359.5 Segment income (loss) Propel $ (23.3) $ (2.5) $ 190.8 $165.0 Work Function (69.5) (0.4) 98.6 28.7 Controls (23.8) (1.2) 74.1 49.1 Stand-Alone Businesses (66.5) 0.1 102.2 35.8 Global Services and other expenses, net (23.9) 1.1 (8.9) (31.7)

Propel Segment

Sales in the Propel segment increased 55 percent during 2010 , excluding the effects of currency fluctuations, mainly due to weak global economicconditions in 2009. Segment income increased significantly in 2010 due to a 21 percentage point increase in gross profit margin, mainly due to higher salesvolume in relation to fixed production costs, as well as a reduction in field recall costs of $11.2 million, reduced depreciation of $5.7 million, reducedinventory valuation allowances of $9.4 million, and fixed cost reductions of $6.1 million. Also contributing to the increase in segment income was a $0.8million gain on sale of equipment. In 2009 the Propel segment incurred a loss on sale of equipment of $3.1 million. Operating expenses decreased in part dueto $15.0 million in severance costs recognized in 2009, partially offset in 2010 by annual incentive plan costs of $3.3 million.

20

Work Function Segment

Sales in the Work Function segment increased 39 percent in 2010 compared to 2009 , excluding the effects of currency fluctuations, mainly due toimproved global economic conditions. The increase in segment income of $98.6 million, excluding the effects of currency fluctuations, was driven by a 29percentage point increase in gross profit margin due to increased sales volume in relation to fixed production costs, as well as fixed cost reductions of $7.9million. Also contributing to the increase in segment income was a reduction in ongoing operating costs of $2.8 million. In 2009 the Company recognizedseverance costs of $7.7 million due to headcount reductions related to lower sales, as well as restructuring costs of $4.5 million related to the closure of theLawrence, Kansas facility and the sale of the steering column business in Kolding, Denmark. Partially offsetting the positive impact of increased sales andcost reductions in 2010 were additional restructuring costs of $4.0 million related to the closure of the Lawrence facility, costs of $1.1 million related to futurelease payments on the Kolding, Denmark facility, and annual incentive plan costs of $1.0 million.

Controls Segment

Net sales in the Controls segment increased 33 percent from 2009 , excluding the effects of currency fluctuations. Sales increased 36 percent excludingthe effects of both currency and the 2009 divestiture of the electric drives business. Segment income increased $74.1 million in 2010 largely due to highersales volume. In addition, costs of $6.3 million related to the sale of the alternating current (AC) product line, restructuring costs of $6.0 million related to theexit from the electric drives business, and severance costs of $4.4 million were recognized in 2009. Partially offsetting the reduced costs related to these itemsin 2010 was a loss on sale of business of $3.5 million, net of royalty income, related to the exit from the electric drives business and annual incentive plancosts of $1.6 million.

Stand-Alone Businesses Segment

Net sales in the Stand-Alone Businesses segment increased 29 percent from 2009 , excluding the effects of currency fluctuations. Segment incomeincreased $102.2 million in 2010 due to higher sales volume, as well as reduced depreciation of $2.4 million. In 2009 the Stand-Alone Businesses segmentincurred a goodwill impairment charge of $50.8 million related to the valves reporting unit, severance costs of $3.3 million related to headcount reductionsdue to lower sales, and restructuring costs of $4.6 million related to the closure of the Lawrence, Kansas facility and the Hillsboro, Oregon facilities. Partiallyoffsetting the positive impact of increased sales and reduced costs in 2010 were annual incentive plan costs of $0.9 million.

Global Services and other expenses, net

Segment costs in Global Services and other expenses, net, relate to internal global service departments. Global services include such costs as consultingfor special projects, tax and accounting fees paid to outside third parties, internal audit, certain insurance premiums, and the amortization of intangible assetsfrom certain business combinations. Global services and other expenses increased $8.9 million, or 37 percent excluding the impacts of currency. The increasein 2010 was partially due to costs of $1.5 million related to a pension settlement with a former executive, $3.5 million of costs related to a stock tender offerinitiated by Danfoss Acquisition, Inc. which expired without the minimum tender conditions being satisfied, and $6.4 million of incentive plan costs. Alsocontributing to the increase was a reduction in gain on foreign currency transactions of $3.1 million during 2010. Partially offsetting the negative impact ofthese items was the fact that there was $3.1 million of severance costs incurred during 2009.

Income Taxes

The Company recognized an income tax benefit of $51.2 million on income of $195.1 million in 2010 .

In 2010 the Company reversed $99.1 million of valuation allowance related to net deferred tax assets in the U.S. Future taxable income projectionssupport the realization of the U.S. net deferred tax assets. Other non-deductible expenses and the worldwide earnings mix also impacted 2010 income taxexpense.

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Executive Summary of 2009 Compared to 2008

The following table summarizes the change in the Company's results from operations by separately identifying changes due to currency fluctuations andthe underlying change in operations from 2008 to 2009 . This analysis is more consistent with how the Company's management internally evaluates results.

(in millions) 2008 Currency fluctuations Underlying change 2009Net Sales $2,090.5 $ (36.1) $ (895.4) $1,159.0 Gross Profit 435.6 (4.2) (303.5) 127.9 % of Net Sales 20.8% 11.0 %Selling, general and administrative 258.5 (8.4) (40.4) 209.7 Research and development 82.9 (2.3) (19.2) 61.4 Impairment charges 58.2 — (7.4) 50.8 Loss on sale of businesses and asset disposals 9.6 0.1 6.7 16.4

Total operating costs 409.2 (10.6) (60.3) 338.3

Operating income (loss) 26.4 6.4 (243.2) (210.4) % of Net Sales 1.3% (18.2)%Interest expense, net (24.6) 1.3 (25.1) (48.4)Loss on early retirement of debt — — (15.8) (15.8)Other, net 0.9 0.1 2.3 3.3

Income (loss) before income taxes 2.7 7.8 (281.8) (271.3) % of Net Sales 0.1% (23.4)%Income tax expense (14.0) 0.6 (47.6) (61.0)

Net loss (11.3) 8.4 (329.4) (332.3)Net income attributable to noncontrolling interest, net of tax (17.8) — 4.3 (13.5)

Net loss attributable to Sauer-Danfoss Inc. $ (29.1) $ 8.4 $ (325.1) $ (345.8)

Net sales for the year ended December 31, 2009 decreased 43 percent compared to the year ended December 31, 2008, excluding the effects of currency.Net sales decreased in all regions and segments. Excluding the impacts of currency, sales declined 48 percent in Europe, 42 percent in the Americas and27 percent in Asia-Pacific. Sales in the Work Function segment decreased by 49 percent, sales in the Controls segment were down 44 percent, followed by areduction of 39 percent in the Propel segment.

Gross profit declined 70 percent during the year ended December 31, 2009, excluding the impact of currency. This decline was primarily driven byreduced sales volume. Other contributing factors included inventory valuation allowances of $13.8 million, accelerated depreciation of $4.0 million, andrestructuring charges of $5.8 million related to the closure of the Hillsboro, Oregon; Lawrence, Kansas; and Odense, Denmark locations.

Selling, general and administrative costs decreased 16 percent during 2009 when compared to the same period in 2008, excluding the effects of currency.This decrease is primarily due to cost reduction efforts taken as a result of the economic downturn, as well as a reduction in costs of $6.6 million related to theimplementation of a common business system. Offsetting these cost reductions were severance costs of $18.2 million and $4.5 million of restructuring costsrelated to the closure of the Hillsboro location and the exit from the electric drives business in 2009, compared to similar costs of $4.9 million in 2008.Research and development costs decreased 23 percent excluding the effects of currency due to cost reduction efforts.

The Company reported goodwill impairment charges of $50.8 million during the first quarter of 2009 related to the valves reporting unit within theControls segment. In 2008 the Company reported impairment charges of $58.2 million, consisting of $22.9 million of goodwill impairment, and property,plant and equipment impairment of $35.3 million. The goodwill impairment related to the motors and steering reporting units within the Work Functionsegment and the electric drives reporting unit within the Controls segment. The impairment charges were incurred as a result of lower profitability in the

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reporting units than the Company had previously expected, and lower future expectations in certain end markets. The property, plant and equipmentimpairment related to the Work Function segment and resulted from lower earnings expectations related to the products produced within the asset group.

During the year ended December 31, 2009 the Company sold its alternating current (AC) electric motor business for the material handling market. Inconnection with this transaction the Company incurred charges of $6.3 million during 2009 and $8.4 million in 2008. In addition, during 2009 the Companyincurred a loss of $2.7 million on the sale of its steering column business in Kolding, Denmark. These activities were part of the Company's plan to divest ofproduct lines that do not fit the Company's long-term strategic direction. During the year ended December 31, 2008, the Propel segment recorded a gain of$1.4 million related to the sale of the LaSalle, Illinois plant.

The Company refinanced various credit agreements during 2009, which resulted in higher interest rates and an increase to interest expense of$25.1 million over 2008. This also resulted in a $15.8 million loss on early retirement of debt in 2009.

Operating Results— 2009 Compared to 2008

Sales Growth by Market

The following table summarizes the Company's sales growth by market. The table and following discussion is on a comparable basis, which excludes theeffects of currency fluctuations.

Americas Asia-Pacific Europe Total

$ Change % Change $ Change % Change $ Change % Change $ Change % Change

Agriculture/Turf Care $ (90.7) (24)% $ (3.2) (24)% $ (76.5) (31)% $(170.4) (26)%Construction/Road Building (82.9) (58) (33.9) (36) (147.7) (66) (264.5) (57)Specialty (86.7) (71) (6.6) (15) (194.1) (51) (287.4) (53)Distribution (96.3) (46) (21.2) (25) (55.6) (39) (173.1) (39)

Agriculture/Turf Care

Sales into the agriculture/turf care market decreased in all regions during the year ended December 31, 2009 compared to 2008. Sales into the agriculturemarket in the Americas remained strong during the first quarter, then declined sharply as commodity prices began a downward trend and customers focusedon inventory reduction. Commodity prices began to stabilize during the fourth quarter, while the Brazilian market showed improvement during the secondhalf of the year compared to the first and second quarters. The European agriculture market continued to decline due to falling commodity prices and theworldwide economic crisis. Turf care sales continue to suffer from depressed housing markets and reduced consumer spending. The Asia-Pacific regioncontributes less than 5 percent of the sales in the agriculture/turf care market, and therefore does not significantly impact the total.

Construction/Road Building

Construction /road building sales were down in all regions during the year ended December 31, 2009 compared to 2008. The sales decline was due topoor economic conditions worldwide, depressed housing and non-residential construction markets, and customers' focus on reducing inventory levels. Non-residential construction slowed rapidly in the Americas, and state government budget problems caused road building to remain at extraordinarily low levels.The Asia-Pacific region experienced strong sales in China due to government stimulus programs and strong demand for transit mixers. However, this wasmore than offset by reduced sales in Japan, which depends heavily on export markets.

Specialty

Specialty vehicles are comprised of a variety of markets including forestry, material handling, marine, waste management and waste recycling. Overallsales into the specialty vehicle market decreased 53 percent compared to 2008. Material handling sales were down across all regions due to poor economicconditions worldwide and severely depressed non-residential construction markets. Offsetting the reduced material handling sales in the Asia-Pacific regionwas an increase in specialty sales in China due to investments made by the Chinese government, as well as increased sales related to the carrier business forrailroad construction. The divestiture of the electric drives business also had a negative impact on sales in Europe and Asia-Pacific.

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Distribution

Products related to all of the above markets are sold to distributors, who then serve smaller OEMs.

Order Backlog

The following table shows the Company's order backlog and orders written activity for 2008 and 2009 , separately identifying the impact of currencyfluctuations.

(in millions) 2008 Currency fluctuation Underlying change 2009Backlog at December 31 $ 743.7 $ 9.8 $ (244.0) $509.5 Orders written 1,927.7 (24.9) (989.5) 913.3

Total order backlog at the end of 2009 was $509.5 million, compared to $743.7 million at the end of 2008. On a comparable basis, excluding the impactof currency fluctuation, order backlog decreased 33 percent compared to 2008. New sales orders written for 2009 were $913.3 million, a decrease of51 percent compared to 2008, excluding the impact of currency fluctuations. The decrease in backlog and order entry is due to the global recession.

Business Segment Results

In 2010 the Company changed its reportable segments however it is not practicable to report the 2008 information in the new format. Therefore thefollowing table provides a summary of each segment's net sales and segment income, separately identifying the impact of currency fluctuations during theyear under the previous segmentation methodology.

(in millions) 2008 Currency fluctuation Underlying change 2009Net sales Propel $1,016.6 $ (7.5) $ (395.7) $613.4 Work Function 561.4 (14.1) (272.6) 274.7 Controls 512.5 (14.5) (227.1) 270.9 Segment income (loss) Propel $ 156.8 $ 1.1 $ (157.9) $ — Work Function (65.7) 4.4 (20.6) (81.9)Controls (21.4) 2.5 (82.2) (101.1)Global Services and other expenses, net (42.4) (0.1) 18.6 (23.9)

Propel Segment

The Propel segment experienced a 39 percent decrease in sales, excluding the effects of currency fluctuations, during 2009 due to weak global economicconditions. The Propel segment experienced an 11 percentage point decrease in operating profit margin in 2009 compared to 2008 mainly due to reduced salesvolume resulting in less absorption of fixed production costs, as well as additional inventory reserves of $8.3 million and accelerated depreciation of$3.4 million due to changing the production location of a product line. Contributing to the reduction in segment income was a $12.7 million increase inseverance costs over 2008, an increase in field recall costs of $6.6 million, and a loss on disposal of fixed assets of $3.1 million. Operating expenses werereduced by $19.7 million due to a focus on reducing costs and lower payroll costs as a result of headcount reductions. In addition, in 2008 the Propel segmentrecognized a gain on sale of a building of $1.4 million.

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Work Function Segment

Sales in the Work Function segment decreased 49 percent in 2009 compared to 2008, excluding the effects of currency fluctuations, due to weak globaleconomic conditions. The reduction in segment income of $20.6 million, excluding the effects of currency fluctuations, was driven by reduced sales,restructuring costs of $3.7 million related to the closure of the Lawrence, Kansas facility, $2.7 million related to the sale of the steering column business inKolding, Denmark, and an increase in severance costs of $1.7 million over 2008 due to headcount reductions related to lower sales. Offsetting the impact ofthese items in the year-over-year comparison was a reduction in expedited freight costs of $8.4 million, reduced depreciation of $4.4 million due to theimpairment of long-lived assets at December 31, 2008, and a reduction in total operating expenses of $18.7 million. In 2008 the Work Function segmentrecognized impairment charges of $17.4 million and $35.3 million, for goodwill and property, plant and equipment, respectively.

Controls Segment

Net sales in the Controls segment decreased 44 percent from 2008, excluding the effects of currency fluctuations, due to weak global economicconditions. Segment income decreased $82.2 million during 2009 due to decreased sales levels, a goodwill impairment charge of $50.8 million related to thevalves reporting unit, and an increase to employee severance costs of $2.2 million compared to 2008. In addition, costs of $6.3 million related to thealternating current (AC) product line, which was sold in the second quarter of 2009, and restructuring costs of $8.7 million related to the closure of theHillsboro, Oregon facility and the exit of the electric drives business were recognized in 2009. Excluding the restructuring and severance costs, operatingexpenses were reduced by $22.5 million. Also, in 2008 the Controls segment recognized goodwill impairment charges of $5.5 million.

Global Services and other expenses, net

Segment costs in Global Services and oth